The Approach to EU and EMU Membership: the Implications for Macroeconomic Policy in Applicant Countries

Introduction

Many commentators have noted the fact that the so-called "Eastern enlargement" of the EU is unique, in the sense that never before have countries which are so much poorer than the EU been admitted. Furthermore, they are being admitted to an EU which is far more internally liberalised (the single market) and intergrated (EMU) than previously. Finally, the applicant countries are far more liberalised internally and open internationally than was the case with the previous enlargement to relatively poor countries (the socalled "Southern enlargement" of the 1980s). We believe that this unique combination of circumstances is likely to generate unanticipated problems for the applicant countries in their conduct of macroeconomic policy in the run-up to EU and later EMU accession. The problems we predict stem from the combination at one time of the following factors:

1. Expected rapid growth in the applicant countries (far faster than the EU itself);
2. Real appreciation resulting from the well known Harrod-Balassa-Samuelson effect;
3. Free capital movements;
4. The need to satisfy the Maastricht criteria and join EMU within ten years.

These factors are likely to lead to high current account deficits, which it will be dificult for the authorities to limit to prudent levels. We describe the underlying pressures in Section 2, discuss suitable macroeconomic policy responses in Sections 3 and 4, and conclude in Section 5. At the core of our analysis lies an attempt to combine what we know about the macroeconomics of rapidly growing poorer countries with the standard presecriptions of the Mundell-Flemming model and the institutional requirements of the pre-EU and pre-EMU accession periods.

This paper was prepared for the research project No. P 96-6089-R (ACE PHARE Programme 1996) on "The Medium and Long-term Perspectives of Fiscal Adjustment of Selected Central European Countries".